The newshas beenabuzz with Allergan, Inc,’s assignment of the patents in the highly lucrative “Restasis” dry-eye drug to the Saint Regis Mohawk Tribe and in turn receiving an exclusive license back. The transfer was so that the validity of the patents could not be challenged in an inter partes review because of the tribe’s sovereign immunity, with the tribe moving to have the IPR dismissed.

Meanwhile, Allergan had sued a number of companies for patent infringement. There was no question that the lawsuit would proceed, but the court has already expressed some thoughts on the validity and impact of the transfer.

The procedural posture is that the court ordered the parties to brief whether the tribe should be added as a co-plaintiff in the infringement suit, with the court concluding that it should be. The decision was really a pragmatic one:

While it is important to ensure that any judgment in this case will not be subject to challenge based on the omission of a necessary party, the Court is not required to decide whether the assignment of the patent rights from Allergan to the Tribe was valid in order to resolve the question whether to add the Tribe as a co-plaintiff. Instead, the Court will adopt the safer course of joining the Tribe as a co-plaintiff, while leaving the question of the validity of the assignment to be decided in the IPR proceedings, where it is directly presented.

But the court was not shy in expressing its opinion on the shenanigans:

The Court has serious concerns about the legitimacy of the tactic that Allergan and the Tribe have employed. The essence of the matter is this: Allergan purports to have sold the patents to the Tribe, but in reality it has paid the Tribe to allow Allergan to purchase—or perhaps more precisely, to rent—the Tribe’s sovereign immunity in order to defeat the pending IPR proceedings in the PTO. This is not a situation in which the patentee was entitled to sovereign immunity in the first instance. Rather, Allergan, which does not enjoy sovereign immunity, has invoked the benefits of the patent system and has obtained valuable patent protection for its product, Restasis. But when faced with the possibility that the PTO would determine that those patents should not have been issued, Allergan has sought to prevent the PTO from reconsidering its original issuance decision. What Allergan seeks is the right to continue to enjoy the considerable benefits of the U.S. patent system without accepting the limits that Congress has placed on those benefits through the administrative mechanism for canceling invalid patents.

If that ploy succeeds, any patentee facing IPR proceedings would presumably be able to defeat those proceedings by employing the same artifice. In short, Allergan’s tactic, if successful, could spell the end of the PTO’s IPR program, which was a central component of the America Invents Act of 2011. In its brief, Allergan is conspicuously silent about the broader consequences of the course it has chosen, but it does not suggest that there is anything unusual about its situation that would make Allergan’s tactic “a restricted railroad ticket, good for this day and train only.” Smith v. Allwright, 321 U.S. 649, 669, 64 S. Ct. 757, 88 L. Ed. 987 (1944) (Roberts, J., dissenting).

Although ultimately not deciding anything about ownership, the court discussed two different reasons the tribe might not own the patents. First was the possibility that the transfer was against public policy, comparing it to unlawful tax shelters and payday lending schemes:

Although sovereign immunity has been tempered over the years by statute and court decisions, it survives because there are sound reasons that sovereigns should be protected from at least some kinds of lawsuits. But sovereign immunity should not be treated as a monetizable commodity that can be purchased by private entities as part of a scheme to evade their legal responsibilities. It is not an inexhaustible asset that can be sold to any party that might find it convenient to purchase immunity from suit. Because that is in essence is what the agreement between Allergan and the Tribe does, the Court has serious reservations about whether the contract between Allergan and the Tribe should be recognized as valid, rather than being held void as being contrary to public policy.

The fact that the tribe gained something didn’t mean it wasn’t a sham:

Allergan argues that the transactions are legitimate because the Tribe has offered consideration in the form of its agreement not to waive its sovereign immunity before the PTO and in exchange has received much-needed revenue from Allergan. But such circumstances are frequently encountered in sham transactions, such as abusive tax shelters. The straw parties who perform the service of making the transaction appear to have economic substance, when it actually does not, are providing a service, for which they are ordinarily well compensated. Nonetheless, the transaction is disregarded if it is contrary to the policies underlying the relevant laws.

The second ownership question was whether the license-back to Allergan was so complete that it was a virtual assignment of the patents to Allergan. If so, then the tribe wasn’t actually the owner and couldn’t be joined:

Allergan argues that the Tribe retained substantial rights, including the right to practice the patents for research, education, and other non-commercial uses, and the first right to sue third parties not related to Restasis bioequivalents. The Court has examined the documents provided by Allergan and regards the question as a close one. Some provisions of the exclusive license, such as the limitations on Allergan’s rights to as particular field of use—specifically, to practice the patents in the United States for all FDA-approved uses—give the Tribe at least nominal rights with regard to the Restasis patents. It is, however, questionable whether those rights have any practical value. There is no doubt that at least with respect to the patent rights that protect Restasis against third-party competitors, Allergan has retained all substantial rights in the patents, and the Tribe enjoys only the right to a revenue stream in the form of royalties.

But, as noted, the court added the tribe as a plaintiff. And the same day found the patents invalid as obvious as dismissed the suit.

This case is reminiscent of the Righthaven copyright trolling scheme, which created jurisprudence that I maintain has impaired the transferability of copyrights reaching well beyond the trolling problem the court was trying to fix. The ultimate decision on the validity of this transfer may have an equally far-reaching impact.

Ms. Chestek is admitted to practice in Connecticut, the District of Columbia, Massachusetts, New York and North Carolina and is Board Certified by the North Carolina State Bar's Board of Legal Specialization in Trademark Law.

Attorney Advertising. Prior results do not guarantee a similar outcome.